Are consumer cancellation fees exempt from the requirement to be fair?

Can a consumer successfully challenge an ‘excessive’ cancellation fee under the Consumer Rights Act 2015?

The High Court recently answered this question in Casehub Limited v Wolf Cola Limited. In this case, the defendant (W) sold cloud storage solutions to consumers on its standard terms and conditions. It charged customers a £20 per month subscription fee for a minimum fixed term of 12 months. If the customer terminated the agreement within the minimum term, a cancellation fee was payable, calculated as a lump sum equivalent to the total of the monthly charges remaining during the minimum term less a discount of 10% to reflect early payment by the customer.

Due to system problems, a number of W’s customers were unable to access the service and terminated their agreements within the first month. They were charged a cancellation fee of £196 each in accordance with W’s terms and conditions.

The claimant (C) took assignments from three customers of their claims against W to be refunded the cancellation fees and sued W. C argued that the cancellation fee provisions in the terms and conditions were unlawful. The specific ground of attack was that the provisions were unfair under Part II of the Consumer Rights Act 2015 (CRA).

What does the CRA say?

The unfair terms provisions in Part II of the CRA implement the Unfair Contract Terms Directive (93/13/EEC) in the UK, and revoke the Unfair Terms in Consumer Contracts Regulations 1999. Section 62 CRA provides that an unfair term of a consumer contract is not binding on the consumer. A term will be unfair if “… contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.”

Section 64(1)(b) CRA provides:

“A term of a consumer contract may not be assessed for fairness under section 62 to the extent that […] the assessment is of the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it.”

The court had to decide if the cancellation fee provisions constituted the “price payable under the contract by comparison with the … services supplied under it”. It held that, although the cancellation fee clearly did not comprise the price payable under the contract, it was a monetary obligation on the customer which formed part of it. The cancellation fee was, in other words, part of the overall price package. Accordingly, it was excluded from a fairness challenge by S64(1)(b) CRA.

The court also considered in detail whether it was permissible for C to take an assignment of the individual consumers’ claims for the purposes of pursuing legal action against W. The question was whether such assignment offended against the public policy laws of maintenance and champerty (i.e. support of litigation in which a party has no legitimate and genuine interest (maintenance) or where they receive a share of the damages (champerty)). The judge held that the assignment of the claims to C was both valid and permissible.

What are the implications?

In its guidance (‘CMA 37’), the Competition and Markets Authority (CMA) explains that the purpose of the S64(1)(b) exemption is to “remove any risk of unnecessary regulation of the […] price in the contract. In a free market economy, parties to a contract are free to shape the principal obligations as they see fit. The relationship between the price and the goods or services provided is determined not according to some legal formula but by the mechanism of the market.” The CMA goes on to say that the S64(1)(b) exemption:

… does not operate to exempt payment terms as such – and particularly not indiscriminately. Rather, it covers terms that go directly to the question of whether the contract price can be considered to be ‘adequate’ or ‘appropriate’ as compared with what is supplied in return … the focus is not on price alone but on the quality/price ratio of the goods or services supplied.”

From the consumer’s perspective, the decision in Casehub v Wolf Cola may appear unsatisfactory – indeed C argued that it was directly at odds with rulings on the point by the European Court of Justice (although the High Court doubted if that was the case). It is noteworthy that neither party was legally represented in court. If they had been, the judge may have been persuaded to make a reference to the European Court of Justice for guidance on the relevance of its earlier rulings, and that may have changed the outcome in this case.

The High Court was at pains to highlight the distinction made by the CMA in its guidance – that what was excluded here was only a challenge on the basis that the fees were excessive in comparison with the services supplied in return (in other words, price versus value). The court made it clear that the cancellation provisions could still be assessed for fairness on the basis that they were otherwise unfair.

Note that in Casehub v Wolf Cola, C may have been able to attack the cancellation provisions as being grey-listed and, therefore, assessable for fairness. For example, Schedule 2 CRA includes as a grey-listed term “a term which has the object or effect of requiring that, where the consumer decides not to conclude or perform the contract, the consumer must pay the trader a disproportionately high sum in compensation or for services which have not been supplied.” However, this argument was not advanced.

The takeaway from this ruling for suppliers is that, although price provisions (including cancellation fees) can never be subject to a ‘price versus value’ type assessment, they are not exempt from the fairness requirement entirely. Suppliers should be mindful of this when drafting price provisions into their terms and conditions.

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